The Ganley/Simms plan could work, but not because it worked in 1790s America
We should applaud serious and committed people like Declan Ganley and Professor Brendan Simms for proposing a way forward for the Euro and EU that is bold and thought provoking – one which also has a successful precedent in the formation of the US federal reserve by Alexander Hamilton in the 1790s.
Ganley is most well known for his efforts to oppose successive Irish referenda on the Lisbon treaty as well as the founding of the pan-European Libertas party. He is therefore stereotyped as a “Eurosceptic”. When I had cause to spend time with him last year I found that nothing could be further from the truth – in the rough and tumble of the two Euro-vote campaigns he ended up being miscast as villain of the piece. In part this may have been because of the “No vote” bedfellows that tagged along with him, but mainly it was the way that a very sophisticated set of decisions were boiled down to a simple thumbs-up or thumbs-down on the whole European project. Anyone who questioned the core or even the nuances of that project was mowed down in hail of negative publicity and downright lies.
At the heart of Ganley’s problem with the EU is how undemocratic the institutions really are – and how far power is removed from the people who are impacted by decisions made by unelected bureaucrats. He would be justified, no doubt, to spend the rest of his life saying “I told you so” although he would also be the first to admit that even the democratic systems he prefers (like the USA) have ended up in a similar debt trap.
The principles of the Ganley/Simms plan have the actions of Alexander Hamilton and the creation of the US Federal reserve at its heart.
In essence, three things result from a Hamiltonian approach to the Euro problem…..
1. The debt of the EU or Euro nations is federalised into one giant pot. So the weaker countries pay significantly lower interest rates and the richer (larger) countries pay slightly more. This is part mathematics but also part confidence exercise (as are all markets). By blending the debt of, say, Greece and Germany, the lender has more confidence that the Greek bit will get paid back, come what may.
2. It’s not all good news for the bondholders, however. The creation of the new all-powerful EuroFed enables a haircut to be delivered to bondholders who will have to “volunteer” to put up with it – something they won’t volunteer to do for Greece for example. Since many of the bondholders are major European banks, they can be carried along more easily – and any external bondholder who wants to make a fuss will risk the wrath of the entire Eurozone.
3. Lastly, as part of the Federalizing of the debt, the European countries involved pass over extra responsibilities and accountability to the new Super-EU. It becomes more like the US Federal bodies. To make this work, Ganley and Simms propose a new range of democratic rules which also fix the underlying problems in the Lisbon treaty.
Or to put it bluntly, we have waded so far across this dangerous river, we are better off now taking the chance of getting further into it than we are turning back to the shore we came from.
There are many reasons why people may not like such a plan. There are philosophical reasons to oppose the plan if you believe that a European superstate is fundamentally wrong for you or your country. There are practical reasons to oppose the plan because you may believe that it won’t be possible to put all this in place before the whole Eurodebt problem blows up catastrophically.
I have a fundamental issue with the use of the Hamilton/US story as a supporting argument for a similar project in Europe. Simply put, the conditions in the USA at the time were so different from modern-day Europe so as to render the comparison meaningless.
Imagine the Americas at that time. There was effectively unlimited land. There was exceedingly cheap (regretfully sometimes free) labour. The entire nation was filled with a sense of personal and economic freedom that attracted people and capital in massive quantities.
It lead to bubbles and busts. It led to wars over matters of power, politics and belief – which led to large debts. It created a nation where the chasms between the rich and the poor were so great that even today’s economic crisis could never fathom those depths.
One of the things that Hamilton did was offer land in the newly-expanding West of the USA to bondholders in return for their haircut. Land that belonged to the native American tribes.
With hundreds of thousands of square miles of “stolen” land bearing near-limitless natural resources and a supply of slave labor it is hard to see how America could have been anything other than an amazing land of opportunity for the monied classes and a real engine for prosperity for some (but not all) American people.
Do you see any parallel with modern-day Europe? Do you see any parallel with the modern-day United States for that matter?
Even with a debt haircut of immense proportions. Even with an interest rate on that debt which is bearable by all parts of the Eurozone. Even with all that, Europe is likely to remain sclerotic at best when it comes to the ability to really generate anything approaching the growth rates enjoyed by the USA following Hamilton’s time as Chief Secretary to the Treasury.
Burdened by demography and by the promises we have made to our own people in terms of healthcare and welfare, we would need to do a lot more than a once-off haircut and reissuing of new Eurobonds to escape the trap that we are in. Repairing the balance sheet is not enough to fix the overwhelming P&L issues we have as countries as pay more for pensions, more for benefits, more for education and more for healthcare. Having filled most of our land, exhausted most of our natural resources, used up the one-time step-change enabled by fossil fuels and with a real competitiveness issue, most of Europe is not poised for growth even if the debt is reduced.
The new Europe would end up seeming to be a permanent subsidy exercise from the Netherlands and Germany to the rest of the new super-state.
None of this is a reason, of course, for not attempting the Ganley/Simms plan. That is a simple binary choice – are we better off joining arms and jumping off the cliff together? Or does Ireland walk away now and possibly miss out on this new, more powerful, United States of Europe?
On balance I would say that Ireland should walk away. Not because the new USofE isn’t a great idea. Not because it couldn’t work to some degree. Not because it wouldn’t be an improvement on the current situation – it certainly would.
No, we jump because that is the only way that we can fix our own problems. Because the Franco-German leadership of Europe likely isn’t capable of delivering this USofE solution.
Of course I could be wrong. This is a huge question hanging over Ireland the whole of Europe. What’s amazing and a little saddening is how little anyone is talking about it….kudos to Messrs Ganley and Simms for getting the ball rolling. However, with another $2bn or so of Irish peoples money about to go to the bondholders of a failed privately-owned bank, we have no time to waste in making a decision.